By Subho Moulik
Indian investors are diversifying globally at an unprecedented pace. Recent data reveals a staggering 108% year-on-year increase in equity investments through the Liberalised Remittance Scheme (LRS), with total remittances reaching $8.37 billion in 2024. This isn’t merely a passing trend but a fundamental shift in investment strategy among Indian investors who are increasingly recognising the importance of geographical diversification.
The drivers behind this transformation are multi-factorial. The steady depreciation of the Indian rupee—from Rs 74.5 in January 2022 to Rs 87.4 in March 2025—provides a structural tailwind, effectively offering an additional 3-4% annual return on US investments.
Meanwhile, direct overseas investment via LRS has emerged as a more cost-effective approach to accessing global markets than domestic mutual funds that invest internationally.
However, as investors venture into US markets, understanding the tax implications becomes crucial for optimising returns. The tax treatment of US investments differs significantly from that of domestic investments, and navigating this complexity can substantially impact net gains.
Capital Gains Tax: India vs US Markets
The tax structures for Indian investors differ depending on whether they invest in domestic or US equities. Understanding these differences is essential for making informed investment decisions and maximising after-tax returns.
Take a look at the following table to better understand how capital gains are taxed in India and the US:
The most striking difference lies in the holding period requirements. For Indian equities, investments held for more than 12 months qualify for the lower long-term capital gains rate. However, when investing in US equities, you must hold your investments for at least 24 months to receive the same preferential tax treatment. This extended timeframe has implications for investment strategy and exit planning.
Short-term gains are also treated differently. While Indian equities incur a flat 20% tax on gains from investments held for less than 12 months, US equity gains (if held for less than 24 months) are taxed according to your applicable income tax slab in India, which could be higher for many investors.
Dividend Taxation and Withholding Considerations
Dividend income presents another layer of complexity for Indian investors. When receiving dividends from US companies, a 25% withholding tax is automatically deducted at source. This contrasts sharply with dividends from Indian companies, which are simply added to your income and taxed at your applicable slab rate.
The US withholding tax isn’t lost entirely, however. Indian investors can claim this amount against their Indian tax liability, reducing the overall tax impact. Nevertheless, this process requires additional documentation and compliance of tax forms.
Strategic Investment Planning for Tax Efficiency
Understanding these tax differences should directly inform your investment strategy. The longer holding period required for favourable taxation of US investments naturally encourages a more patient, long-term approach. This aligns well with investing in established US giants with sustained growth potential, such as the technology and semiconductor companies that many Indian investors are attracted to.
For investors seeking regular income, the dividend withholding considerations make it essential to evaluate the after-tax yield of US dividend stocks compared to Indian alternatives. In many cases, growth-oriented US companies that reinvest profits rather than distributing dividends may offer more tax-efficient returns for Indian investors.
The capital loss offsetting rules, which are similar across both markets, provide opportunities for tax planning. Investors can strategically realise losses to offset gains across their portfolio, though the different holding period definitions must be carefully navigated.
Tax Collection at Source for US Investments
When remitting funds abroad for investing in US markets, Indian investors must navigate the Tax Collection at Source (TCS) requirements. Following the 2025 budget, remittances up to Rs 10 lakh in a financial year now attract 0% TCS, up from the previous threshold of Rs 7 lakh.
This increased limit provides greater flexibility for investors making moderate-sized allocations to US markets. Amounts exceeding this Rs 10 lakh threshold continue to trigger a 20% TCS (reduced to 5% for education-related remittances).
It’s crucial to understand that TCS is not an additional tax burden but rather an advance tax collection mechanism. The entire TCS amount paid during a financial year can be claimed as a credit when filing your income tax return. Effectively, the TCS amount is fully adjustable against your total income tax liability for the year.
For active investors regularly deploying capital to US markets, this TCS mechanism can create a temporary cash flow concern. While the amount is ultimately recoverable, there is an opportunity cost to having funds locked up until tax filing and refund processing.
Strategic planning of your remittance schedule—perhaps breaking larger investments into tranches below the Rs 10 lakh threshold across different financial years—can help optimise this cash flow impact while remaining fully compliant with regulations.
Optimising Your Global Portfolio
Investment vehicles matter significantly when considering tax implications. Exchange-traded funds (ETFs) may offer advantages over individual stocks in many scenarios, potentially providing more tax-efficient exposure to US markets. The expense ratios of US-listed ETFs (typically around 0.1%) are substantially lower than those of Indian mutual funds investing abroad, creating better after-tax returns.
Sector allocation should also consider tax treatment. Sectors like technology often focus on capital appreciation rather than dividend distribution, potentially creating more favourable tax scenarios for Indian investors, given the dividend withholding considerations.
The timing of investments and redemptions becomes particularly important given the distinct holding period thresholds. Planning exits around the 24-month mark for US investments (versus 12 months for Indian investments) can significantly impact your after-tax returns.
Building a Tax-Efficient Global Portfolio
As global investing becomes increasingly mainstream for Indian investors, integrating tax planning into investment strategy becomes essential. Understanding the nuances of how Indian and US equities are taxed differently allows investors to make more informed decisions about portfolio allocation, investment vehicles, and investment horizons.
Tax considerations should never be the sole driver of investment decisions, but they should be a significant factor in how you structure your global portfolio. By strategically planning your US investments with these tax differences in mind, you can significantly enhance your after-tax returns while maintaining the benefits of global diversification.
In an investment landscape where every percentage point matters, tax-efficient investing across borders may well be the difference between good and exceptional returns.
(Author is Founder & CEO, Appreciate)
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